U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934:
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________.
Commission File Number 1-13012
H.E.R.C. PRODUCTS INCORPORATED
(Name of small business issuer as specified in its charter)
Delaware 86-0570800
(State of Incorporation) (IRS Employer
Identification Number)
2215 W Melinda Lane, Suite A
Phoenix, Arizona 85027
(Address of principal executive offices)
(623) 492-0336
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Outstanding at
Class August 10, 2000
----- ---------------
Common Stock, $.01 par value 11,686,033
Transitional Small Business Disclosure Format: YES [ ] NO [X]
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Index To Consolidated Financial Statements
PART I. FINANCIAL INFORMATION Page No.
Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2 - Changes in Securities 12
Item 6 - Exhibits and Reports on Form 8-K 12
2
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2000 1999
------------ ------------
ASSETS
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 495,827 $ 65,722
Trade accounts receivable, net of allowance
for doubtful accounts of $28,319 and
$44,620, respectively 503,178 873,045
Inventories 32,830 45,990
Deferred expenses 82,572 118,443
Other receivables 2,438 8,611
Prepaid expenses 172,136 120,380
------------ ------------
Total Current Assets 1,288,981 1,232,191
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment 1,183,077 1,107,000
Less accumulated depreciation 617,167 508,773
------------ ------------
Net Property and Equipment 565,910 598,227
------------ ------------
OTHER ASSETS
Patents, net of accumulated amortization
of $69,528 and $109,465, respectively 111,085 108,017
Patents pending 90,039 89,104
Refundable deposits and other assets 24,278 62,579
------------ ------------
Total Other Assets 225,402 259,700
------------ ------------
$ 2,080,293 $ 2,090,118
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 134,148 $ 263,462
Accrued wages 54,782 77,503
Current portion of notes payable 86,958 30,592
Customer Deposits 58,605 --
Other accrued expenses 134,790 267,601
------------ ------------
Total Current Liabilities 469,283 639,158
LONG-TERM LIABILITIES
Notes payable, net of current portion 2,845 6,134
------------ ------------
Total Liabilities 472,128 645,292
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $10.00 stated value;
authorized 1,000,000 shares;
issued and outstanding zero shares -- --
Common Stock, $0.01 par value; authorized
40,000,000 shares; issued and outstanding
11,676,187 and 11,652,853 shares, respectively 116,762 116,529
Additional paid-in capital 13,980,350 13,972,584
Accumulated deficit (12,488,947) (12,644,287)
------------ ------------
Total Stockholders' Equity 1,608,165 1,444,826
------------ ------------
$ 2,080,293 $ 2,090,118
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
3
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Sales $ 935,295 $ 648,165 $ 2,618,637 $ 1,614,753
Cost of Sales 512,178 292,598 1,317,605 707,676
------------ ------------ ------------ ------------
Gross Profit 423,117 355,567 1,301,032 907,077
Selling Expenses 108,019 93,451 228,991 198,767
General and Administrative Expenses 438,320 408,666 914,415 795,423
------------ ------------ ------------ ------------
Operating Profit (Loss) (123,222) (146,550) 157,626 (87,113)
------------ ------------ ------------ ------------
Other Income (Expense)
Interest Expense (2,614) (4,417) (12,596) (9,272)
Miscellaneous 4,516 9,539 10,310 14,496
------------ ------------ ------------ ------------
Total Other Income (Expense) 1,902 5,122 (2,286) 5,224
------------ ------------ ------------ ------------
Income (Loss) From Continuing Operations (121,320) (141,428) 155,340 (81,889)
Discontinued Operations:
Income From Disposal of Discontinued
Segments -- 46,282 -- 46,282
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes (121,320) (95,146) 155,340 (35,607)
Income Tax Provision -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) (121,320) (95,146) 155,340 (35,607)
============ ============ ============ ============
Net Income (Loss) Per Common Share
- Basic and Diluted
Net Income (Loss) Per Common Share $ (0.01) $ (0.01) $ 0.01 $ --
============ ============ ============ ============
Weighted Average Common Shares Outstanding:
Basic 11,676,187 11,563,391 11,671,187 11,544,825
============ ============ ============ ============
Diluted 11,676,187 11,563,391 11,801,423 11,544,825
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30
------------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 155,340 $ (35,607)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 123,729 108,825
Gain on sale of equipment -- (28)
Common stock issued for services 7,999 29,200
(Increase) decrease in assets
Trade accounts receivable 369,867 294,976
Inventories 13,160 (15,938)
Deferred expenses 35,871 7,456
Other receivables 6,173 (2,757)
Prepaid expenses (58,356) (74,983)
Refundable deposits and other assets 38,301 23,975
Increase (decrease) in liabilities
Accounts payable (129,314) (29,979)
Accrued wages and other accrued expenses (155,532) (33,204)
Customer Deposits 58,605 (42,447)
Change in net liabilities of discontinued operations -- (7,661)
--------- ---------
Net cash provided by operating activities 465,843 221,828
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (76,077) (61,148)
Cash received from the sale of equipment -- 10,000
Expenditures related to patents and patents pending (12,738) (15,471)
--------- ---------
Net cash used in investing activities (88,815) (66,619)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable and long-term debt 151,870 155,996
Principal payments under notes payable (98,793) (119,786)
--------- ---------
Net cash provided by financing activities 53,077 36,210
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 430,105 191,419
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 65,722 242,867
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 495,827 $ 434,286
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
5
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements are presented in accordance with
the requirements of Form 10-QSB and consequently do not include all of the
disclosures normally made in an annual Form 10-KSB filing. Accordingly, the
consolidated financial statements of H.E.R.C. Products Incorporated ("HERC")
included herein should be reviewed in conjunction with the consolidated
financial statements and the accompanying footnotes included within HERC's Form
10-KSB for the year ended December 31, 1999.
The consolidated financial statements have been prepared in accordance with
HERC's customary accounting practices and have not been audited. In the opinion
of management, the consolidated financial statements reflect all adjustments
necessary to fairly report HERC's financial position and results of operations
for the interim period. All such adjustments are normal and recurring in nature.
The interim consolidated results of operations are not necessarily indicative of
results to be expected for the year ending December 31, 2000.
NOTE 2 - REVENUE RECOGNITION
HERC recognizes revenue when products are shipped. HERC also performs
pipe-cleaning services, which are recorded when the work is complete. Included
in sales are certain reimbursable costs from HERC's customers.
NOTE 3 - LONG TERM DEBT AND OTHER FINANCING ARRANGEMENTS
HERC has a factoring facility whereby the factor purchases eligible receivables
and advances 80% of the purchased amount to HERC. Purchased receivables may not
exceed $600,000 at any one time. Either party may cancel the arrangement with 30
days notice. At June 30, 2000, there were no factored receivables. This
arrangement is accounted for as a sale of receivables on which the factor has
recourse to the 20% residual of aggregate receivables purchased and outstanding.
Interest payable by HERC to the factor is calculated as a fixed discount fee
equal to 1% of the amount of the receivable factored plus a variable discount
fee computed on the amount advanced to HERC and accruing on the basis of actual
days elapsed from the date of the 80% advance until 5 days after collection of
such account receivable by the factor at a per annum rate equal to an internal
rate set by the factor.
NOTE 4 - SEGMENT INFORMATION
Information by segment for the three months ended June 30, 1999:
Pipe Industrial
Cleaning Chemicals Corporate Consolidated
-------- --------- --------- ------------
Sales to unaffiliated customers $557,716 $ 90,449 $ -- $ 648,165
Income (loss) from continuing operations 114,783 35,286 (291,497) (141,428)
Total assets 968,901 106,133 697,982 1,773,016
Depreciation and amortization 36,740 1,500 14,539 52,779
Capital expenditures 12,173 -- (3,161) 9,012
6
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Information by segment for the three months ended June 30, 2000:
Pipe Industrial
Cleaning Chemicals Corporate Consolidated
-------- --------- --------- ------------
Sales to unaffiliated customers $ 756,420 $178,875 $ -- $ 935,295
Income (loss) from continuing operations 44,464 114,151 (279,935) (121,320)
Total assets 1,202,590 124,775 752,928 2,080,293
Depreciation and amortization 44,908 1,877 16,239 63,024
Capital expenditures 34,446 -- 2,346 36,792
Information by segment for the six months ended June 30, 1999:
Pipe Industrial
Cleaning Chemicals Corporate Consolidated
-------- --------- --------- ------------
Sales to unaffiliated customers $1,436,470 $178,283 $ -- $ 1,614,753
Income (loss) from continuing operations 411,099 69,208 (562,196) (81,889)
Total assets 968,901 106,133 697,982 1,773,016
Depreciation and amortization 73,028 3,000 32,797 108,825
Capital expenditures 57,973 -- 3,175 61,148
Information by segment for the six months ended June 30, 2000:
Pipe Industrial
Cleaning Chemicals Corporate Consolidated
-------- --------- --------- ------------
Sales to unaffiliated customers $2,335,413 $283,224 $ -- $2,618,637
Income (loss) from continuing operations 610,749 124,934 (580,343) 155,340
Total assets 1,202,590 124,775 752,928 2,080,293
Depreciation and amortization 87,627 3,755 32,347 123,729
Capital expenditures 56,579 13,757 5,741 76,077
NOTE 5 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators (weighted average number of
shares outstanding) of the basic and diluted earnings per share (EPS)
computation for the six months ended June 30, 1999 and 2000 is as follows:
Three Months Ended June 30, 1999
--------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $(95,146) 11,563,391 $(0.01)
======
Effect of stock options and warrants -- --
-------- ----------
Diluted EPS $(95,146) 11,563,391 $(0.01)
======== ========== ======
7
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended June 30, 2000
--------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $(121,320) 11,676,187 $(0.01)
======
Effect of stock options and warrants -- --
---------- ----------
Diluted EPS $(121,320) 11,676,187 $(0.01)
========= ========== ======
Six Months Ended June 30, 1999
------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $(35,607) 11,544,825 $ --
======
Effect of stock options and warrants -- --
-------- ----------
Diluted EPS $(35,607) 11,544,825 $ --
======== ========== ======
Six Months Ended June 30, 2000
------------------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $155,340 11,671,187 $0.01
======
Effect of stock options and warrants -- 130,236
-------- ----------
Diluted EPS $155,340 11,801,423 $0.01
======== ========== =====
NOTE 6 - COMMITMENTS AND CONTINGENCIES
LITIGATION
On or about January 14, 1999 in the Supreme Court of the State of New York,
County of Suffolk, the Suffolk County Water Authority and R & L Well Drilling,
LLC filed as a third-party plaintiff a civil claim against HERC in an action
filed on April 8, 1998 by five individual residents of Ronkonkoma, New York,
alleging negligence resulting in personal injury and seeking monetary damages of
$11 million. HERC, acting through its insurance carrier pursuant to the
submitted claim under its comprehensive general liability policy, has
substantially denied liability for the original claim. The insurance carrier
advises that the five claims involved in the action have been tentatively
settled, pending judicial approval, for a total of $30,000. The HERC liability
insurance carrier will pay one half of the settlement amount while the liability
insurance carrier for the Suffolk County Water Authority and R & L Well Drilling
will pay the other half.
8
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133 (as amended by SFAS No. 138), "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES," which requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The issuance of SFAS No. 37, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133," delayed the required effective date of SFAS No. 133
to all fiscal years beginning after June 15, 2000. The Company will be required
to adopt SFAS No. 133, as amended, on January 1, 2001. Management does not
believe that the adoption of SFAS No. 133, as amended, will have a material
impact on its results of operations or financial position.
On December 3, 1999, the Securities and Exchange Commission staff (the Staff)
issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition." Subsequent to
its issuance, the Staff elected to defer the required implementation date. The
Company will be required to adopt SAB 101 during the fourth quarter of 2000.
Management believes that the adoption of SAB 101 will not have a material impact
on the Company's financial position or results of operations.
9
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB and in future filings by HERC with the Securities
and Exchange Commission ("SEC"), in HERC's press releases and in oral statements
made with the approval of an authorized executive officer of HERC, the words or
phrases "are expected", "HERC anticipates", "will continue", "believe",
"project", "estimated", "will enhance" or similar expressions (including
confirmations by an authorized executive officer of HERC of any such expressions
made by a third party with respect to HERC) are intended to identify
"forward-looking statements" within the meaning of that term in Section 27A of
the Securities Act of 1933, as amended ("the Act"), and Section 21E of the
Securities Exchange Act of 1934 as amended. Readers are cautioned not to place
undue reliance on any such forward-looking statements, each of which speak only
as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those currently anticipated or projected. Such risks
include, but are not limited to, adequate cash flow and financing for
implementation of its business plan, continued growth in its various customer
segments, effective marketing of its products directly by HERC and through
marketing partners and the other risks detailed in the HERC Form 10-KSB filed
with the SEC. HERC has no obligation to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect any
anticipated events or circumstances occurring after the date of such statements.
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the unaudited consolidated financial
statements and the related disclosures included elsewhere herein.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Sales of $935,000 in the second quarter were $287,000 ahead of 1999 second
quarter sales of $648,000 because of increases in revenue generated from pipe
cleaning services and industrial chemical sales. Sales of pipe cleaning services
were $756,000 compared to $558,000 in the second quarter of 1999. Of the pipe
cleaning work, $632,000 was performed pursuant to a contract with the United
States Navy compared to $462,000 in 1999. Industrial chemical sales increased to
$179,000 for the second quarter of 2000 compared to $90,000 in 1999.
Consolidated gross margins were 45% and 55% in 2000 and 1999, respectively. The
reduction in gross margin percentage in 2000 is the result of cleaning pipe
systems on different classes of ships as well as cleaning ships outside of the
Norfolk, Virginia area that resulted in higher cleaning costs. HERC expects that
gross margin percentages will continue to fluctuate as changes in revenue mix
occur.
Gross profit increased from $356,000 in 1999 to $423,000 in 2000 due to
increased revenue. General and administrative expenses increased by $30,000
primarily because of increases in personnel. Selling expenses increased by
$15,000 because of increased commissions and personnel.
HERC's operating loss decreased to $123,000 in 2000 from $147,000 in 1999. Net
loss was $121,000 for the second quarter of 2000 compared to $95,000 for the
same period in 1999. The net loss in 1999 included income from discontinued
operations of $46,000.
10
H.E.R.C. PRODUCTS INCORPORATED AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Sales of $2,619,000 for the six months ended June 30, 2000 were $1,004,000 ahead
of sales of $1,615,000 for the comparable period in 1999 because of increases in
revenue generated from pipe cleaning services and industrial chemical sales.
Sales of pipe cleaning services were $2,335,000 compared to $1,436,000 for the
six months ended June 30, 1999. Of the pipe cleaning work, $2,042,000 was
performed pursuant to a contract with the United States Navy compared to
$1,086,000 in 1999. Industrial chemical sales increased to $283,000 for the six
months ended June 30, 2000 compared to $178,000 for the same period in 1999.
Consolidated gross margins were 50% and 56% in 2000 and 1999, respectively. The
reduction in gross margin percentage in 2000 is the result of cleaning different
types of pipe systems and pipe systems on different classes of ships as well as
cleaning ships outside of the Norfolk, Virginia area that resulted in higher
cleaning costs. HERC expects that gross margin percentages will continue to
fluctuate as changes in revenue mix occur.
Gross profit increased from $907,000 in 1999 to $1,301,000 in 2000 due to
increased revenue. General and administrative expenses increased by $119,000
mainly because of increases in payroll and staffing in key management areas.
Selling expenses increased by $30,000 primarily because of increased commissions
generated by higher revenue.
HERC realized an operating profit of $158,000 for the six months ended June 30,
2000 compared to an operating loss of $87,000 for the comparable period in 1999.
Net Income was $155,000 for the six months ended June 30, 2000 compared to a net
loss of $36,000 for the same period in 1999. The net loss of $36,000 in 1999
included income from discontinued operations of $46,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $496,000 at June 30, 2000 and $66,000 at December
31, 1999. Working capital was $820,000 and $593,000 at those respective dates.
The increase in cash during 2000 is a function of cash provided by operating and
financing activities offset by cash used in investing activities.
As of June 30, 2000, HERC had no factored receivables under its factoring
facility. (See Note 3 to the consolidated financial statements)
HERC currently contracts with one customer responsible for a majority of HERC's
revenues and HERC expects the high concentration level to continue throughout
2000. Thus, any material delay, cancellation or reduction of orders from this
customer could have a material adverse effect on HERC's operations and financial
position. Sales to the U.S. Navy under the Navy contract accounted for 78% and
67% of consolidated revenues for the six months ended June 30, 2000 and 1999,
respectively.
Management has no plans to sell additional securities to raise cash and can make
no guarantee that it could sell additional securities. However, any such sale,
if necessary, would substantially dilute the interest of HERC's existing
stockholders.
11
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
During the second quarter of 2000 HERC issued 9,846 shares of common stock as
compensation to its outside Board of Directors. These shares were issued under
an exemption from registration pursuant to section 4(2) of the securities act of
1933.
During the second quarter of 2000 HERC issued to certain key employees options
to purchase 20,000 shares of common stock at an exercise price of $0.40 per
share. These options were issued under the 1996 Performance Equity Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K: NONE
EXHIBITS
Regulation S-B
Exhibit No. Exhibit
----------- -------
(27) Financial Data Schedule
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
H.E.R.C. PRODUCTS INCORPORATED
----------------------------------------
(Registrant)
Date: August 10, 2000 By: /s/ S. Steven Carl
------------------------------------
S. Steven Carl
Chief Executive Officer
By: /s/ Michael H. Harader
------------------------------------
Michael H. Harader
Chief Financial Officer (Principal
Financial and Accounting Officer)
13